Fusing monetary and fiscal policies for inclusive growth

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For one whom financial pundits thought was drafted into Nigeria’s apex financial and monetary policy institution to douse the tension in the system, the new Central Bank of Nigeria Governor, Godwin Emefiele is kicking up a small storm of his own.  But this CBN boss is going about it in the now recognisable style, his hands of steel embedded in soft, velvety gloves.

Witness his pledge to gradually bring down key interest rates in the economy to match international standards; the lightning-quick review of Bureaux de Change guidelines aimed at straightening out the loops and blocking the leakage in the foreign exchange market; the re-introduction of token access fees for ATM users and the adjustment to the cash-less policy — all coming soon after taking up the mantle of leadership.  Not one of many words, Emefiele says he is tired of the glib talk of Nigeria’s “potential” and would rather dwell on “living the dream” by making the Central Bank of Nigeria a “model central bank” that delivers financial system stability and promotes sustainable economic development.

A keen watcher of the international financial scene, Emefiele brings to bear his knowledge of the latest trends in finance and economics.  Noting that the rich world’s central banks have transited to using ‘direct methods’ to intervene and support key sectors of their economies, he is leading the CBN to act likewise and move beyond price and monetary stability.

In this brief interview, the Governor discusses the CBN’s intervention in critical sectors of the economy which complements the efforts of the fiscal authorities to deal with rising unemployment, cuts poverty and enhances access to credit, especially for micro, small and medium-scale enterprises (MSMEs), the world-acclaimed growth drivers.

Going through your strategic Agenda, it is clear that the CBN under your leadership will be involved in direct funding of some projects. Don’t you think such a stance will affect monetary and fiscal policy coordination in the economy?
The issue of monetary and fiscal policy coordination is critical if we must achieve the overall economic goal of the state. Recent developments around the world indicate that maintaining strict divisions in macroeconomic management may not guarantee policy sustainability in the long run. We saw it happen in the United States of America in their effort to contain the aftershock of the Global Financial Crises. The FED had to engage in what is now regarded as the Unconventional Monetary Policy when the Bank had to intervene directly to provide liquidity in some distressed private sector organizations. We have seen some international multilateral organizations recently questioning the need for this compartmentalization, and therefore urge a pragmatic approach to monetary and fiscal policy coordination in achieving goals such as inclusive growth and reduction of unemployment. In our own case, we have identified some very critical sectors such as power, agriculture, health and manufacturing as some of the sectors that will receive the attention of the Bank in terms of funding and other strategic interventions. We have observed that until we fix infrastructure, we cannot meaningfully grow the economy, reduce unemployment and possibly address the issue of poverty.

What informed CBN’s strategic intervention in the power sector?
It might interest you to note that provision of steady power supply alone will revolutionize this economy in a phenomenal way. Investments in this sector cannot be left to the private sector alone; it requires some strategic interventions to make the difference. That is exactly what we are doing in a way that does not jeopardize monetary and fiscal policy cohesion.

Have you considered the possible credibility backlash this intervention could have if the Bank loses the progress it had made in recent past, especially on price stability, while pursuing other extraneous objectives?
Well, we are conscious of our credibility as a central bank, because the Central Bank of Nigeria survives on credibility and ability to anchor public expectations either in stabilizing prices, or any other objectives it set out to achieve for that matter. However, credibility is not only about ensuring that objectives are static as in ensuring that inflation for instance must be stable always or that the exchange rate must be within a predetermined band irrespective of developments in the economy to the contrary. If there are indications that policy will change given some developments in the economy, the CBN can communicate such developments and proactively anchor public expectations in the future in that direction.

Note and most importantly, is that, in our strategic agenda, it is clearly stated that we will ensure that we carry the general public along in our policy choices and implementation modalities. Therefore, if there is need for the Bank to reverse its policy stance at any point in time given developments in the economy, we will effectively communicate same to the public in a way that our credibility as the nation’s bank is not at risk even when policy targets change. It is this flexibility that enabled the FED to quickly change their policy stance and expectations during the global financial crises. They embraced policies that ordinarily should not have been considered in normal circumstances and the public showed a lot of understanding.

What strategy have you devised to ensure the CBN maintains its credibility?
One very effective way open to the Bank in ensuring that it maintains its credibility, especially in times of uncertainty is to opt for forward guidance, which is essentially about providing information in a proactive way of what might be the behaviour of variables in the future and what the Bank will do to contain such proactive information that usually assists agents to anchor their expectations appropriately.

In view of the path we have chosen in our strategic Agenda, we are already working out a comprehensive communication strategy that will factor the special interventions in the real sector. For instance, we are seriously convinced that we can add employment in our subsidiary objectives and this will be structured into our communication strategy.

In recent times, inflation figures have risen steadily from 7.9 percent in April through June and 8.3 percent in July. What might be responsible for this, and what strategies do you have in place to halt this upward trend?
Yes, you are right in your observation, but note that, the upward trend is mainly driven by food inflation, and this is why we are very much focused on addressing issues surrounding food supply and prices in our strategic agenda which was unveiled immediately I took office in June. We have both short and medium term strategic approach to ensure that food production ceases to be a problem in the achievement of the price stability objective of the Bank. Let me start with the short term measures. We have identified a number of interventions in the sector to fund agriculture and food production in the short term. Some of them include the increase in un-collateralized loan to local cooperatives engaged in farming which is now N50,000 and increasing the number of such loans to 20 percent in the next few years.

For some time now, banks have been reluctant to be involved in funding agriculture value chain.  How is the CBN addressing this issue?
We have decided to enhance the capacity of banks to return to agricultural finance by organizing workshops and seminars for their desk officers, and to generally ensure that banks are involved in funding agriculture value chain on a more sustainable way. The long term approach is to ensure that we maintain stable exchange rates which naturally induce imported food inflation. We identified cash crops such as wheat, rice, sugar and cotton; these are cash crops that their import bills exert enormous pressure on our Forex reserves. We are therefore convinced that, if they are locally produced, this will conserve Forex that will ensure that our exchange rates remain stable, and therefore reduce the impact of increasing food prices due to depreciations in exchange rates.


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October 2016